MGM: WAITING TO FIND OUT WHAT’S BEHIND DOOR #2

The good news: MGM management negotiated their way to an amendment on their credit facility to push them past a probable March 31st covenant breach. The bad news: the extension expires on 5/19/09.

Our initial view was that since the extension was only for 2 months, it probably means that MGM is either: 1) close to some transaction, financing, etc (good) or 2) the banks are throwing MGM a short lifeline but really just postponing the inevitable foreclosure (very bad). After discussion with people very versed in bankruptcies and reorganizations, we believe #1 is possible but #2 is unlikely. This is probably not as binary a situation as it may appear.

Our main takeaway here is that MGM and the banks are in pretty much the same situation as before their amendment agreement. The banks do not want to foreclose and MGM needs to make progress on a long-term solution to its liquidity issues. We don’t think May 19th is a drop dead date. It’s a reevaluation date.

So what are MGM’s options? Pretty much the same as before. Importantly, MGM did not collateralize any of its assets, so that improves their position to get outside financing. Any solution will certainly involve asset sales. More amendments, sale leasebacks, an equity infusion, and debt swaps (higher rate for longer maturity) could all be part of the mix.

We’re disappointed that the company didn’t announce a more concrete solution. The duration of any definitive outcome is likely to be much longer than the amendment would indicate. We are pretty confident in that. MGM will continue to trade as an option with huge volatility. MGM promises to be very communicative with the Street, unlike the last few weeks. With the number of potential data points over the next several weeks/months, MGM could be an attractive trading vehicle, particularly given what is likely to be an active day for the stock today.

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